Climate-related financial disclosure Q&A on exposure draft legislation

This short Q&A explains what is in the 12 January 2024 exposure draft legislation. The exposure draft is out for consultation until 9 February 2024 only. Note there are some differences between the Treasury’s published summaries of the legislation and its current wording. There are also some typographical and technical drafting errors in the exposure draft legislation that are not mentioned here. We expect some changes to the legislation before it is introduced to Parliament.

In the Q&A:

• FY25 is the financial year that begins, for an entity, on a date between 1 July 2024 and 30 June 2025 (and so on).
• ASIC Act is the Australian Securities and Investments Commission Act 2001 (Cth).
• Captured entity is the term Treasury uses to describe a company, disclosing entity, registered managed investment scheme (MIS) or registrable superannuation entity (RSE) to which the climate-related financial disclosure (CRFD) regime applies.
• Corporations Act is the Corporations Act 2001 (Cth).
• NGER Act is the National Greenhouse and Energy Reporting Act 2007 (Cth). An NGER reporter is an entity that is registered or required to apply for registration under the NGER Act.
• TCFD is the Taskforce on Climate-related Financial Disclosures
   

​1  What will CRFD require?

Captured entities will need to include a separate ‘sustainability report’ in the annual report, alongside the financial report and the directors’ report. The sustainability report must be audited (but see Q13), and lodged with ASIC. Captured entities are also required to keep ‘sustainability records’ for seven years.
 

2  Which entities are captured by CRFD?

CRFD captures any company, disclosing entity, registered MIS or RSE that lodges its annual report with ASIC and that, in the financial year:

• is an NGER reporter;
• satisfies (including any controlled entities) at least two of the following three criteria: (1) its consolidated revenue is $50 million or more; (2) the value of its consolidated gross assets is $25 million or more; and (3) it has 100 or more employees;
• has assets (alone or including any entities it controls) valued at $5 billion or more.

It potentially applies to both listed and unlisted entities.
 

3  When do the CRFD obligations commence?

The legislation divides captured entities into three groups. The CRFD obligations apply to Group 1 from FY25, to Group 2 from FY27, and to Group 3 from FY28.

Group 1 (from FY25) comprises:

• NGER reporters that meet a threshold under s 13(1) of the NGER Act; and
• entities that satisfy (including any controlled entities) at least two of the following three criteria: (1) its consolidated revenue is $500 million or more; (2) the value of its consolidated gross assets is $1 billion or more; and (3) it has 500 or more employees.

Group 2 (from FY27) comprises:

• other NGER reporters; and
• entities that satisfy (including any controlled entities) at least two of the following three criteria: (1) its consolidated revenue is $200 million or more; (2) the value of its consolidated gross assets is $500 million or more; and (3) it has 250 or more employees; and
• entities with assets of $5 billion or more.

Group 3 (from FY28) is all other captured entities (see Q2).
 

4  How many entities are captured?

Treasury’s Policy Impact Analysis: Climate-related Financial Disclosures (September 2023) (PIA) released with the exposure draft legislation contains some estimates based on 2021 figures. At a minimum, Treasury expects that:

• Group 1 is 729 entities (including 361 NGER reporters);  
• Group 2 is 755 entities (including the remaining 362 NGER reporters); and
• Group 3 is 4,555 entities.

Elsewhere in the PIA, Treasury estimates the total number of captured entities at 1,800 but this is not accurate. It may be that the estimate of 1,800 only includes Group 3 entities that are expected to disclose a material climate impact (see Q11), but this is not clear.

Given the way entity is defined, it seems that a sustainability report for an investment fund will only be required if the RSE or registered MIS (that is, the fund rather than the fund operator or trustee) has assets of at least $5 billion. 
 

5  What will it cost to comply?

The PIA estimates initial transition costs of $1 million to $1.3 million per entity, and ongoing costs of between $500,000 and $700,000 per entity per year. Of course, that will vary depending on factors such as the size of the entity or group and the nature of its operations.
 

6  What must be disclosed in the sustainability report?

The sustainability report will comprise four parts: the ‘climate statements’, the notes to the climate statements, any additional statements ‘relating to matters concerning environmental sustainability’ prescribed by the Minister, and the directors’ declaration (see Q12).

The climate statements are the ‘climate statements in relation to the entity required by the sustainability standards’. The sustainability standards will be made by Australian Accounting Standards Board (AASB) under the ASIC Act. AASB released its exposure draft sustainability standards for public consultation in October 2023. It includes three draft Australian Sustainability Reporting Standards (ASRS Standards):

• [draft] ASRS 1 General Requirements for Disclosure of Climate-related Financial Information, developed using IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information as the baseline but with a scope limitation to climate-related financial disclosure;
• [draft] ASRS 2 Climate-related Financial Disclosures, developed using IFRS S2 Climate-related Disclosures as the baseline; and
• [draft] ASRS 101 References in Australian Sustainability Reporting Standards, developed as a service standard that would be updated periodically to list the relevant versions of any non-legislative documents published in Australia and foreign documents that are referenced in ASRS Standards.

The proposed disclosure is described in the PIA in the following terms. Captured entities (other than Group 3 entities that can disclose no material climate impact – see Q11) will be required to:

• Disclose information about governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities.
• Use qualitative scenario analysis to inform their disclosures, moving to quantitative scenario analysis by end state.
• Disclose climate resilience assessments against at least two possible future states, one of which must be consistent with the global temperature goal set out in the Climate Change Act 2022 (Cth).
• Disclose transition plans, including information about offsets, target setting and mitigation strategies.
• Disclose information about any climate-related targets (if they have them) and progress towards these targets.
• Disclose information about material climate-related risks and opportunities to their business, as well as how the entity identifies, assesses and manages risk and opportunities.
• Disclose scope 1 and 2 emissions for the reporting period.
• Disclose material scope 3 emissions from their second reporting year onwards. Scope 3 emissions disclosures made could be in relation to any one-year period that ended up to 12 months prior to the current reporting period.
• Have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity.

The AASB sustainability standards will probably cover these matters. The list goes beyond the disclosure requirements in IFRS S2 and beyond the current TCFD requirements.
 

7  What else must be disclosed, beyond what is required by the AASB sustainability standards?

Three further things, beyond the AASB sustainability standards, will affect what captured entities must disclose. The first is that the Minister can add a requirement to include other statements about “matters related to environmental sustainability” by legislative instrument.

The second is that, except for Group 3 entities with no material climate risks or opportunities (see Q11), additional information must be included in the notes to the climate statements if disclosure made in accordance with the sustainability standards would not provide four specified disclosures. The specified disclosures are:

• the material climate risks the entity faces and the material climate opportunities the entity has for the financial year (if any);
• any climate related metrics and targets (including metrics and targets relating to scope 1, 2 and 3 emissions of greenhouse gas) required to be disclosed by the sustainability standards;
• any governance policies related to these matters required to be disclosed by the sustainability standards; and
• from the entity’s second reporting year onwards, its scope 3 emissions for the financial year or other period specified in the sustainability standards (so, for Group 1 from FY26 onwards, for Group 2 from FY28 onwards and for Group 3 from FY29 onwards).

The requirement to supplement the disclosures required by the sustainability standards in the notes appears to be modelled on the current requirement in financial reports to supplement the disclosures provided under the accounting standards to give a ”true and fair view”. It is intended to ensure substantive compliance with the high-level disclosure principles where that would not be achieved through technical compliance with the sustainability standards.

The third is that, in FY25, FY26 and FY27, ASIC can give directions to an entity to change its sustainability report if ASIC thinks it is “misleading in any way”.
 

8  Can disclosure be provided on a consolidated basis?

If the accounting standards require a group head of a corporate group to prepare consolidated financial statements, and the group head elects to prepare a consolidated sustainability report, it can do so for the whole group.
 

9  For entities already reporting under former TCFD, is this a significant change?

The PIA estimates that about 55 per cent (165 entities) of listed entities in Groups 1 and 2 (ASX300) and 15 per cent (178 entities of unlisted entities in Groups 1 and 2) currently disclose against the voluntary framework introduced by TCFD in 2017. It assumes that no entities in Group 3 are doing so.

The CRFD will significantly expand and alter the obligations of entities currently disclosing against the former TCFD. The PIA, in making the case for standardised mandatory CRFD, quotes an Australian Council of Superannuation Investors (ACSI) report from 2023 that concludes that “full reporting under the TCFD framework is not necessarily sufficient, as the TCFD does not specify the level of quantitative or qualitative detail required or disclosure of how the company identifies risks. As a result, entities are able to make broad, qualitative statements in order to comply”. The new law is intended to require more, and more specific, disclosure.

Also, because the disclosure under CRFD is mandatory and is folded into the annual report, the liability settings are more onerous than for voluntary TCFD disclosure (see Q14).
 

10  What are the captured entities’ record-keeping obligations?

If a captured entity must prepare a sustainability report for a financial year, it must keep written records that “correctly explain and record its preparation of the following parts of the sustainability report”: the climate statements, any notes to the climate statements, and any statements about matters relating to environmental sustainability required by the Minister. These include “documents and working papers needed to explain the methods, assumptions and evidence” from which these disclosures are made up.

Conceivably, an entity (particularly in Group 3) may not know until the end of the financial year that it is required to prepare a sustainability report for that year. But it may be prudent to keep the records, as failure to create and keep these records for seven years is a criminal offence (including a strict liability criminal offence).
 

11  What about Group 3 entities with no material climate impact?

Group 3 entities that decide that they “do not face material climate risks” and “do not have material climate opportunities” can satisfy the climate statements disclosure in the sustainability report with a statement to that effect. Materiality is required to be decided “in accordance with the sustainability standards”. The Group 3 entity is still required to provide a sustainability report including this climate statement and the other components including the directors’ declaration, and to keep records.
 

12  What declarations must the directors make?

The sustainability report (like the financial report but not the directors’ report) must include directors’ declarations made by a resolution of the board. The first directors’ declaration goes to whether the notes to the climate statements (in compliance with the sustainability standards) include “an explicit and unreserved statement of compliance with international sustainability reporting standards”.

The second goes to whether, in the directors’ opinion, the climate statements, notes to the climate statements and additional statements required by the Minister are “in accordance with the Act” including that they comply with the sustainability standards and any additional Ministerial requirements, and that they contain the specified disclosures mentioned in Q7.

The resolution carries with it the implied representation that the directors have a reasonable basis for that opinion. These declarations must be made in an entity’s first and all subsequent sustainability reports. However, sustainability reports will not be audited until FY31, and the board will not have an auditor’s report on which to rely until FY31 (see Q13).
 

13  What is the timetable for assurance?

For each financial year commencing before 1 July 2030, the entity is required to have its statements about scope 1 and scope 2 emissions reviewed by an auditor. However, the requirement to have the sustainability report audited does not commence until FY31. The auditor’s report goes to the same matters as the directors’ declaration (see Q12): whether, in the auditor’s opinion, the climate statements, notes to the climate statements and additional statements required by the Minister are “in accordance with the Act” including that they comply with the sustainability standards and any additional Ministerial requirements and that they contain the specified disclosures mention in Q7.
 

14  What happens if there is an error in or an omission from the sustainability report?

The liability settings are the same as for the entity’s financial reports. For the company, this includes potential exposure to a number of regulatory actions and private civil claims for misleading conduct (whether intentional, negligent or innocent) including under Corporations Act pt 9.4B for contraventions of Corporations Act pt 7.10 or s 1309 or under ASIC Act pt 2 div 2.

A statement about a future matter is taken to be misleading unless the entity can prove it had reasonable grounds for making it. This reverses the burden of proof for establishing the accuracy of disclosures about future matters from the person alleging it is defective to the person making it. This burden may be difficult to discharge if reliable third-party assurance (for example, an audit report) is not available.

For directors, their potential liability includes exposure to civil and civil penalty proceedings if there is a failure to take care in relation to the sustainability report, for example under Corporations Act ss 180, 344 and 1308.
 

15  What are the ‘modified liability’ arrangements for FY25, FY26 and FY27?

The exposure draft legislation includes some modified liability arrangements. These go to whether a private litigant (for example, a shareholder) or ASIC can bring proceedings for disclosure failures in a sustainability report for FY25, FY26 or FY27 against the entity, its directors and other officers, or others who are implicated in the disclosure failure.

The modified arrangements purport to restrict private litigants or ASIC bringing proceedings based on a statement about scope 3 emissions, or a scenario analysis. It precludes civil proceedings by parties other than ASIC, and restricts ASIC to applications for declarations and injunctions for contraventions of provisions that do not include a fault element.

As drafted, the modified liability arrangements are extremely limited. They only apply to defects in:

• FY25, FY26 and FY27 sustainability reports; and
• statements about scope 3 emissions or ‘scenario analysis’ (as defined in the sustainability standards).

Therefore the modified liability arrangements expire before Group 3 entities are required to produce their first sustainability report and four years before audit reporting commences in FY31. The modified liability arrangements do not protect entities or their officers against:

• civil proceedings by private litigants based on statements relating to anything other than scope 3 emissions or scenario analyses; or
• civil proceedings by ASIC seeking declarations or injunctions; or
• pecuniary penalties for breaches of civil penalty proceedings that have a fault element (including negligence) such as Corporations Act ss 180, 344, 1308 and 1309; or
• criminal actions, suits or proceedings, including for strict liability (that is, no fault) criminal offences or conducted as private prosecutions.